Intuit's Free Tax Filing Gamble

Can a company make money by offering free tax filing? Watch and see with Intuit.

Let's face it. Tax preparation and filing can be a long, stressful, and expensive ordeal. Popular software programs such as Intuit's (NASDAQ:INTU) TurboTax and TaxCut by H&R Block(NYSE:HRB) have eased the frustration with self-filing because the programs guide the user through each step of the process. The competition for your tax business is heating up. Companies are slashing prices-- in some cases to zero -- to gain a competitive edge.

This year Intuit unveiled a free online service called SnapTax designed for people who use form 1040EZ and most 1040A forms. There are a few exceptions. People with taxable incomes of more than $100,000 can't use SnapTax, nor can those with retirement income, IRA deductions, and certain qualified dividends. It's a sweet deal for a multitude of taxpayers, but investors may be wondering how the company can turn a profit from a free service. That is a Foolishly good question.

Actually, there is a charge; at least for those who want their refund fast. Customers have the option of paying $5.95 to electronically file their return and receive a refund in as little as 10 days using electronic deposit versus up to six weeks for returns sent by mail. Electronic filing of state returns -- with the exception of California -- won't be available until next year. So you still have to snail mail your state return. Bummer.

For those who don't qualify for SnapTax, Intuit offers TurboTax for the Web. This service isn't free but includes discount coupons for PCs, digital cameras, and spring break travel spots. So you can file your taxes while planning to spend your refund on a trip to a warm, sunny beach. In addition, Intuit has given TurboTax for the Web a new user interface to make it more familiar to customers who use popular sites such as Yahoo!(NASDAQ:YHOO) and Amazon.com(NASDAQ:AMZN).

This leads me to question the whole idea behind offering a free tax prep service and making money from it. Officially, revenues from SnapTax are growing quickly. But TurboTax clearly is where the money is made, and one has to wonder about the possibility of cannibalization from SnapTax.

Versus either a $0 or $5.95 intake for SnapTax, 1040EZ filers using regular TurboTax would pay $15.90 to print or e-file both federal and state returns. Taxpayers filing the 1040 and 1040A would fork over $44.90, while those who need extra paperwork -- schedules C, D, or E -- have to cough up nearly $55 to file. Buying a copy of TurboTax for your desktop runs from $20 to $70 depending on the version, and that doesn't include state filing.

So how is TurboTax selling these days? Recent figures show a slight decline of 1% in sales so far this season. To counter the slide, Intuit has cut prices on one service by 50% for a limited time, but will cheaper prices -- thus lower margins -- help the financial software maker's bottom line?

Pricing pressure from H&R Block will likely hurt sales and slow the company's tax revenue growth this year to 5% to 10%, compared with 13% in fiscal 2004. This is a reason for concern since January has typically shown an increase in units sold. Meanwhile, Intuit's stock year-to-date has suffered a 12% drop, versus a 3% drop in H&R Block's stock.

Millions of U.S. taxpayers will qualify for the free tax prep service. It's too early to say whether SnapTax and the competition will significantly cut into Intuit's bottom line. That won't be known until the tax season is over. This Fool thinks Intuit will need to come up with other intuitive ways to keep customers paying.

Fool contributorKelvin Taylor does not own shares of any of the companies mentioned.